By Noah Barkin
BERLIN, Nov 25 (Reuters) - German Chancellor Angela Merkel's consensus-seeking governing style has helped hold an unwieldy coalition together, but her cautious approach to the economic crisis is beginning to raise concerns in her party and abroad.
Since turmoil shook markets and the global financial sector in mid-September, Merkel's government has favoured a wait-and-see approach over aggressive intervention -- first with German banks and now with the broader economy.
She was forced to reverse course on the banks last month, agreeing belatedly to a 500 billion euro ($643.7 billion) rescue package after initially ruling out sector-wide aid.
Now she is under pressure to do more for an economy which sank into recession in the third quarter and risks posting its biggest contraction next year since World War Two.
A grab-bag of measures agreed by her government earlier this month is looking more inadequate by the day as grim new economic figures pile up and partners like Britain and the United States push ahead with far-reaching stimulus plans.
"The careful approach that Merkel honed to perfection over the past three years suited the demands of her coalition," said Peter Loesche, a political scientist at Goettingen University. "But this crisis has raised the stakes and demanded a different approach and stronger leadership."
A chorus of criticism has risen in the run-up to a party congress of Merkel's Christian Democrats (CDU) in Stuttgart next week, where her conservatives will unveil an election strategy that will shirk bold new ideas for the economy in favour of modest voter-friendly measures.
"SMALL STEPS"
Merkel learned a lesson during her last campaign, when she advocated tough labour market reforms and a tax overhaul only to see her wide poll lead vanish in the weeks before the election.
In the end she barely squeaked by her main rivals, the centre-left Social Democrats (SPD), and was forced into an uneasy ruling partnership with them.
As leader of a "grand coalition", Merkel reined in her policy plans. In her first major speech after taking office in 2005, she vowed to take a "small steps" approach to governing.
She has stuck doggedly to that strategy over the past three years -- avoiding conflict at home and using her skills as a mediator to secure international agreements on climate change and EU reform last year.
Staying above the fray has worked. Merkel remains highly popular in Germany and polls give her conservatives a double-digit lead over the SPD 10 months before the election.
Still, the economic downturn and questions about her crisis management pose a rising threat to her re-election hopes.
Merkel has stood by SPD Finance Minister Peer Steinbrueck in resisting tax cuts and other aggressive fiscal measures to shield the economy.
But in Stuttgart her party will promise tax relief after the next election -- a delay economists say is difficult to justify given Germany's recessionary spiral.
"To resist tax cuts now but promise them after the election makes absolutely no sense," said Thomas Mayer, chief European economist at Deutsche Bank in London.
"It seems those responsible in Berlin are incapable of thinking out of the box. Personally, and as an economist, I am disappointed that the government has not shown more leadership."
Mayer estimates Berlin's current stimulus plans amount to just 0.2 percent of gross domestic product (GDP) over the next two years. He believes a fiscal boost closer to 2 percent of GDP is warranted given Germany's strong budget situation.
PRESSURE MOUNTS
The pressure for more aggressive stimulus measures is likely to mount in the coming weeks.
Merkel will have to defend her resistance to bold fiscal steps at a EU summit on Wednesday after struggling to mask differences with French President Nicolas Sarkozy on a Monday visit to the Elysee in Paris.
Sarkozy said on Tuesday his government would launch a "quite massive" stimulus plan in the next 10 days, including measures to boost the construction sector and the car industry which also faces difficulties in Germany.
Senior members of her CDU are growing impatient, fearing their party will suffer in a series of state elections next year if the downturn worsens.
"We need to send a short-term signal on taxes and labour costs," Gerald Weiss, head of a conservative group in parliament that represents German employers, told Reuters on Tuesday.
Already signs are emerging that Merkel could shed her cautious approach to stimulating the economy. On Monday she said she would meet with SPD leaders in January to assess the need for further measures.
"If the pressure from within her party continues to mount, Merkel will have to change tack," said Loesche. "Right now, she is sticking to her guns to avoid the impression of waffling, but that may not be sustainable for long." (Editing by Ralph Boulton) (Additional reporting by Andreas Moeser)